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The debate over lifting the ceiling for bankers’ bonuses has reignited in the UK, as the new chancellor raises the possibility once again.

Remuneration in the banking sector always generates heated debate, inside and outside the industry. Specifically, the limit on bankers’ bonuses had garnered much attention and is set to become a focal point again, as the new UK chancellor of the exchequer, Kwasi Kwarteng, recently announced his plans to remove the restriction on bankers’ variable pay.

Mr Kwarteng is looking to boost the City of London’s competitiveness against New York, Frankfurt, Hong Kong and Paris and secure London’s future role as a global financial centre post-Brexit.

The EU imposed a cap on bonuses in 2014, setting the threshold at no more than 100% of salary, or 200% with shareholder approval. The aim was to curb risky trading and investments that fuelled the global financial crisis (GFC) of 2007-09, effectively forcing the banking industry to better tie pay to performance. Even after the Brexit vote, it continues to apply to the largest banks operating in the UK.

Critics have long argued that the cap doesn’t reduce bankers’ incentives, but simply shifts how they are paid toward higher fixed salaries. Many believe that this actually weakens the link between performance and compensation.

“The EU wasn’t able to cap absolute pay, so introduced the cap by reference to fixed pay. It led to an increase in fixed pay and therefore a significant increase in fixed costs at banks, which meant that banks had less flexibility to reduce outgoings in a downturn,” says Alexandra Beidas, global head of employment and incentives at Linklaters. “For that reason, there has always been a question mark over whether it would be retained after Brexit.”

Individuals at banks who are subject to the bonus cap have mixed feelings about it, according to Ms Beidas. “Some welcomed the increased fixed pay and certainty they have on their remuneration. Others would prefer to have more of their pay based on performance,” she says.

“If firms use the freedom resulting from any removal of the bonus cap, this would also mean that a greater proportion of pay that bankers receive is subject to performance and reduction or clawback in the event of misconduct, failures of risk management, or similar,” she adds.

The UK has always favoured the concepts of deferral and, by implication, clawback, if bonus-generating transactions ultimately turn sour, and was moving to put such a regime in place as early as 2009, as The Banker reported at the time.

Speaking to the Financial Times earlier this month, a Bank of England spokesperson said: “The remuneration rules on deferral, clawback and malus are more effective tools for ensuring bankers take proper account of risks.” Clearly, those rules won’t be done away with anytime soon.

Is it time to scrap the cap? According to a snap poll of The Banker’s LinkedIn community, around 70% believe that it is time to remove the limit on bonuses. As one member comments: “The GFC was 14 years ago. With the regulatory framework and risk methodologies in place, surely the bonus cap should be lifted?”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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